Third Amended Complaint Filed in Life Insurance Company of Alabama Shareholders' Lawsuit

Earlier, we mentioned that there was an Eleventh Circuit Court of Appeals ruling that was favorable to the minority shareholders suing Life Insurance Company of Alabama, which resulted in the federal court in Alabama ordering the shareholders to file file one final amended complaint against the company and its directors. That third amended complaint has now been filed, so we thought we would quote from some interesting sections:

  • In some cases, a large book value discount at an insurance company might indicate an asset quality problem, suggesting the company's assets were not worth their carrying values. However, LICOA's assets then and now consisted primarily of a rather “vanilla” corporate bond portfolio managed by outside advisers. The distress that the market price of the non-voting shares was (and is now) implying is managerial in nature. As discussed herein, it would ultimately be revealed that a group of relatives took legal control of LICOA by owning a majority of shares and have used and continue to use this control inequitably to the detriment of minority shareholders. Interestingly, during the pendency of this litigation, that discount seems to have widened and narrowed based on the market perception of Plaintiffs' likelihood of success in the litigation, indicating that it is indeed the inequitable conduct causing the distressed trading price of the non-voting shares.
  • The economic purpose of an insurance company, from a shareholder perspective, is to raise funds from policyholders and invest them at a profitable spread. Using borrowed money (“Float”) from the insurance customers as leverage and investing it in a bond portfolio ought to offer shareholders a higher return on their capital. But because the controlling shareholders of LICOA overpay themselves and otherwise waste money, the return on equity that minority shareholders receive is lower than the underlying yield on the bond portfolio. The minority shareholders bear all the risk of an insurance company's financial leverage (where the total assets are approximately three times the shareholder capital) but without the benefit of any increased return.
  • Causey’s husband Michael—who also works for LICOA—has had a similar social media presence, claiming to “Live in Alabama, but rarely there! Love traveling the globe in search of the best life has to offer...”. Like his wife, Mr. Causey also posted pictures of a lavish lifestyle of global travel and extravagance. The problem with the Causeys—and their family members who are also Director Defendants in this case—is that consistent with their social media profiles, their interests lie with funding and maintaining their lifestyles – not the interests of the shareholders of LICOA consistent with their fiduciary and statutory duties.
  • Even though Daugette is the Chairman of LICOA and his brothers-in law Lowe and Renfrow have subordinate titles, each year they are paid virtually the same amount. In 2019, LICOA began paying Causey a matching amount as well. For four executives of varying tenure, title, and seniority to receive virtually identical compensation shows that LICOA's compensation is not based on the market value of services rendered, but rather it is a de facto family dividend. The controlling shareholders have hired each other and split a disproportionate share of LICOA's profits according to a negotiated scheme amongst themselves. Tellingly, LICOA does not have any board minutes, compensation studies, or any documents whatsoever that explain how these nearly identical compensation levels were established.
  • After this litigation ensued—and after Terry Jacobs, whose family members are LICOA shareholders (“Jacobs Shareholders”), was disclosed as a witness and potential plaintiff—Defendants caused LICOA to purchase the Jacobs Shareholders’ shares at nearly three times the then-trading value of the LICOA shares (i.e., much closer to the book value). See Exhibit I. Near the same time, Director Daugette was purchasing the shares of other, uninformed shareholders at much lower prices, demonstrating how the Director Defendants game the system to keep share prices artificially low for their own oppressive repurchasing scheme, even though they know that the true value of the shares is much higher, as exhibited by the much higher price paid for the more knowledgeable Jacobs Shareholders' shares.
  • The Daugette, Renfrow, and Causey family members receive extravagant six figure salaries, some of which is for “no show” or “no work” jobs, and all of this excessive compensation is a de facto dividend that shareholders who are not family members do not receive. See Exhibit K. This compensation has been rising even as the company's profitability has deteriorated in recent years. See Exhibit L. As self-dealing transactions, these payments to insiders need to be entirely fair (both stemming from a fair process and resulting in a fair outcome). The burden of proof is on the Director Defendants to show that payments to these insiders are entirely fair, but since they run their business in a “Mafia Style” without written records, they will be unable to meet this burden.
  • The most egregious usurpation of a repurchase opportunity was committed by Daugette after the Lightfoot investigation and report. During the coronavirus chaos of 2020, Daugette personally bought shares from small shareholders for less than a quarter of tangible book value, while shortly thereafter he had LICOA pay three times as much for the Jacobs Shareholders' shares. If it was a good deal for LICOA to pay the Jacobs Shareholders $31.88 per LINSA share, then Daugette clearly usurped an even better opportunity from LICOA when he personally bought LINSA shares for prices as low as $10 per share – using LICOA resources such as employees, email accounts, and letterhead to conduct these personal purchases. After having his independent director patsies rubber-stamp his past misconduct with the Lightfoot straw-man investigation, he now feels emboldened to commit even more blatant abuses.

The entire Third Amended complaint is embedded below. The voluminous exhibits are in a second embed after that.

Licoa - Plaintiffs’ Third Amended Consolidated Complaint by Nate Tobik on Scribd

LICOA Third Complaint Exhibits by Nate Tobik on Scribd

No comments:

Post a Comment